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Working Paper Cites Discovery of Giffen Goods in China

Can people respond to an increase in the price of a good by consuming more of it? Certainly this is possible with art or wine, where price signals quality or status, but what about ordinary commodities like bread or rice? Goods for which (without status effects) demand increases with their prices are known as “Giffen” goods, and economists have been debating their possibility for more than a century. Now, two economists are claiming a breakthrough. Robert T. Jensen and Nolan H. Miller argue in a new Kennedy School Working Paper, “Giffen Behavior: Theory and Evidence,” that they have identified Giffen behavior among residents in the Chinese provinces of Gansu and Hunan.

“The fact that there has to date been no convincing evidence of Giffen behavior stands as a minor embarrassment to economists, one that is reflected in the discussion of the Giffen phenomenon often being presented as a paradox of economic theory rather than as a real (or even possible) mode of behavior,” the authors write.

Using data gathered during a five-month field experiment in which they subsidized the primary dietary staple – rice in Hunan and wheat flour in Gansu – for a randomly selected group of poor households, Jensen and Miller found that households responded to the subsidy by decreasing their consumption of their respective staple goods.

“We find strong, clear evidence of Giffen behavior among poor households in Hunan, China, and somewhat less robust evidence in Gansu. To the best of our knowledge, this is the first rigorous empirical evidence of Giffen behavior,” the authors concluded. “It is ironic that despite a long search, in sometimes unusual settings, we found examples in the most widely consumed foods for the most populous nation in the history of humanity. However, the examples were found exactly where theory would predict they should occur: impoverished consumers, heavily dependent on a staple good, with limited substitution possibilities.”

The paper is currently undergoing peer review.

Robert T. Jensen is visiting associate professor at the Watson Institute for International Studies at Brown University. Nolan H. Miller is associate professor of public policy at the Kennedy School. The research was supported by the Kennedy School Dean’s Research Fund, the Center for International Development at Harvard University, and the Hefner China Fund (Kennedy School Asia Programs), the National Institute of Aging, and the William F. Milton Fund at Harvard Medical School.